Estimating Taxes in Retirement

Retirement is supposed to be the time you finally get to relax. You’ve worked hard, saved up, and now it’s your turn to enjoy life. But even when the alarm clock stops going off and the 9-to-5 is behind you, estimating taxes in retirement is still an important part of the picture.

If you want to make the most of your retirement savings, you need to have a good idea of how taxes will affect your income. The earlier you start thinking about this, the easier it is to avoid surprises down the road.

Here’s how to estimate those taxes and create a solid plan. Let’s get into it!

Start with Your Income Sources

Back when you were working, figuring out your taxes was relatively simple. Your paycheck spelled everything out and taxes were automatically withheld. But retirement income doesn’t always come from just one place. You might be getting money from:

• Social Security
• A pension
• Traditional IRAs or 401(k)s
• Roth IRAs
• Dividends or investment income
• Maybe even some part-time work

Each of these is taxed differently, and how much you pay depends on the mix of those income sources.

Social Security

You might assume Social Security benefits aren’t taxed—but that’s not always the case. The IRS looks at your “combined income,” which includes:

• Your adjusted gross income
• Any non-taxable interest
• A percentage of your Social Security benefits

Depending on your combined income, up to 85% of your Social Security benefits could be taxable.

For single filers:

• Combined income between $25,000 and $34,000 = up to 50% of benefits may be taxable
• Combined income over $34,000 = up to 85% of benefits may be taxable

For joint filers:

• $32,000–$44,000 = up to 50% taxable
• Over $44,000 = up to 85% taxable

So while Social Security can help cover retirement expenses, it’s important to know what chunk of it might go toward taxes.

Pensions

If you have a pension, you’ll likely need to pay taxes on the monthly payments you receive. The exact tax rate will depend on the type of pension you have and how much of it you contributed. Some pensions are fully taxable, while others have tax-deferred components. You’ll want to check with your pension administrator to get an accurate picture of how much of your pension income is taxable.

Retirement Account Withdrawals

One of the biggest surprises retirees face is the tax implications of withdrawing from retirement accounts like 401(k)s or IRAs. When you withdraw funds from these accounts, the money is taxed as ordinary income. This can be a big hit to your tax bill, especially if you’re taking large withdrawals or if you didn’t plan for the taxes in advance.

The amount of tax you owe depends on the total withdrawals you make, your tax bracket, and other income sources. One thing to remember is that if you have a Roth IRA, you won’t owe taxes on qualified withdrawals. But for traditional IRAs and 401(k)s, you’re looking at taxes on the full amount you withdraw.

Tax Brackets in Retirement

The IRS uses a tiered tax bracket system, meaning the more you earn, the higher percentage of your income gets taxed. Estimating taxes in retirement is especially important because knowing where you land in these brackets can help you understand how much you’ll owe on the income you bring in.

Here are the current tax brackets for 2025:

• 10%: Income up to $11,000 ($22,000 for married couples)
• 12%: Income from $11,001 to $44,725 ($22,001 to $89,450 for married couples)
• 22%: Income from $44,726 to $95,375 ($89,451 to $190,750 for married couples)
• 24%: Income from $95,376 to $182,100 ($190,751 to $364,200 for married couples)
• 32%: Income from $182,101 to $231,250 ($364,201 to $462,500 for married couples)
• 35%: Income from $231,251 to $578,100 ($462,501 to $693,750 for married couples)
• 37%: Income over $578,101 ($693,751 for married couples)

To estimate your taxes in retirement, you’ll need to know which bracket your total income falls into. If you’re planning on withdrawing a large chunk from your 401(k) or pension, it’s easy to end up in a higher bracket than you expect. This can be especially tricky if you haven’t planned for how taxes will affect your retirement income.

Using Tax-Advantaged Accounts to Minimize Taxes

One way to estimate your taxes in retirement—and keep them lower—is to use tax-advantaged accounts strategically. Here are a few options to consider:

Roth IRAs

If you’ve got a Roth IRA, you’re in a better position for tax-free withdrawals in retirement. Since you’ve already paid taxes on the money you contributed, you won’t owe any tax on the earnings when you withdraw them. That’s a huge perk, but it requires early planning—Roth IRAs are most beneficial when you contribute over a long period of time, allowing your money to grow without the tax burden.

Health Savings Accounts (HSAs)

HSAs are another great tool for reducing taxes in retirement. You can contribute pre-tax dollars to an HSA, which can grow tax-free and be used for qualified medical expenses in retirement. If you’re eligible for an HSA, consider maxing out your contributions while you’re still working so that you can use the funds later without the tax consequences.

Taxable Investment Accounts

Taxable accounts aren’t tax-advantaged, but they offer flexibility in how you withdraw your funds. You can manage your taxable account withdrawals to minimize taxes by timing them based on your other income or by focusing on investments that generate qualified dividends or long-term capital gains (which are taxed at lower rates than ordinary income).

Estimating Taxes in Retirement: A Step-by-Step Guide

Now that you’ve got an idea of how different income sources are taxed in retirement, let’s walk through a process to estimate your taxes: 

1. Add up all your income sources: This includes Social Security, pension income, retirement withdrawals, rental income, and part-time work. Make sure to account for everything.
2. Estimate your taxable income: Subtract any deductions you’re eligible for (standard or itemized) from your total income. This will give you your taxable income.
3. Determine your tax bracket: Using the current tax brackets, figure out where your taxable income falls. This will help you estimate how much of your income will be taxed at each rate.
4. Use a tax calculator: Tax calculators, such as the Ultimate Tax Planning Guidebook, can make this step easier by breaking down the math for you.
5. Account for tax credits: Don’t forget to apply any tax credits you may be eligible for, like the senior tax credit or credits for energy-efficient home improvements.
6. Consider state taxes: Some states have income taxes, and others don’t. Make sure to check your state’s tax rules for retirees to ensure you’re factoring in the right numbers.
7. Adjust your withdrawal strategy: Once you’ve got a sense of what your tax bill might look like, you can adjust your retirement income strategy. For example, you may want to delay tapping into certain accounts until you’re in a lower tax bracket or shift your withdrawals to more tax-efficient sources.

How to Reduce Your Taxes in Retirement

It’s never too early to start planning for taxes in retirement. Here are a few tips to help reduce your tax burden when you do retire:

• Contribute to tax-advantaged accounts while you’re working: The earlier you start contributing to tax-deferred retirement accounts like 401(k)s and IRAs, the more money you can put away and the less you’ll pay in taxes when you retire.
• Consider Roth conversions: If you’ve got a traditional IRA, consider converting it to a Roth IRA before you retire. This allows you to pay taxes on the conversion amount now, rather than on every withdrawal you make later.
• Keep your income steady: It’s tempting to take large withdrawals in retirement, but keeping your withdrawals steady and predictable can help you avoid jumping into a higher tax bracket.
• Work with a tax professional: Taxes in retirement can get tricky. Working with a professional can help ensure you’re taking full advantage of tax-saving strategies, and it can save you a ton of time and stress.

Don’t Let Taxes in Retirement Catch You Off Guard

Taxes might not go away in retirement, but that doesn’t mean they have to be a headache. The better you plan now, the more freedom you’ll have to actually enjoy retirement when the time comes.

Want to get ahead? Go through the steps to estimate your retirement taxes—it’s one of the best things you can do to avoid surprises later.

And if you’d rather not go it alone, we’ve got your back. Our team of tax pros can help you build a strategy that keeps more of your money in your pocket.